Diverging further from the Federal Reserve’s increasingly hawkish stance, the Bank of Japan continued to ease monetary policy aggressively forcing the Japanese Yen to plunge by the most since March 2020 against the U.S. dollar.
The Fed raised interest rates earlier this month and signaled more tightening would follow to curb soaring inflation, meanwhile the BOJ offered for the first time to buy an unlimited amount of 10-year government bonds over the next three days.
BOJ Governor Haruhiko Kuroda’s commitment to continue with stimulus has pushed the spread between U.S. and Japanese benchmark yields to the widest since 2019.
Before paring back some losses to trade near 123.85 the yen fell as much as 2.5% to 125.09 against the greenback today, the weakest since August 2015.
This Year, so far the yen is down more than 7% against the dollar, by far the most among major pairs, and the widening interest-rate differential stands to weaken the currency further.
The next major resistance in the USD/JPY chart is the near-20 year high from 2015 at 125.86. As long as global yields continue rising and the Bank of Japan continues providing unlimited support for its bond market, the pressure to weaken the Japanese Yen will continue.
The exposure of Japan to higher oil prices as a net importer has exacerbated the poor performance of the Yen, particularly against currencies of commodity producing nations.
That means the yen has also lost some of its appeal as a haven and hasn’t been able to capitalize on bouts of risk aversion from the war in Ukraine.
The weakening of the yen in the near-term can be attributed to the recent improvement in global investor risk sentiment, higher yields outside of Japan and continued upward pressure on commodity prices.
If the yen falls past 130 to the dollar, Japan should intervene in foreign exchange markets or raise interest rates to help keep the yen afloat.
Governor Kuroda said last week stable inflation was needed to trigger policy change at the central bank, not yen weakness. The government is paying close attention to the recent depreciation of the yen and trends in foreign exchange markets.
The rapid collapse of the yen which we have been observed since the beginning of March is likely to have been too rapid even for the BOJ’s taste.